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Is It Time To Consider Refinancing Again?

Mortgage rates have dropped to nearly a 40 year low.  The last time rates were this low was back in 1971.  Many have refinanced their homes in recent years but are now considering refinancing yet again.  Simply because you can achieve a lower rate on your current mortgage does not necessarily mean that you should refinance.

Closing Costs

One of the largest factors in refinancing are the closing costs.  Consider the following example:

Current Mortgage Rate Of 5.75% on a $250,000 mortgage would equal a monthly payment of about $1,458.

New Mortgage Rate of 4.75% would lower the monthly payment to $1,304.  A monthly savings of $154.

Based on the above figures, it would make sense to refinance right?  Who doesn’t want to save $154 monthly?  Well, not so fast.  We have yet to to factor in the closing costs.  The amount you will pay in closing costs will vary widely based on what your local fees are, but a good average to use is about 3 percent of the loan amount.  In this example, if the closing costs were $7,500 it would take 48 months to break-even on the the refinance.

$7,500 (closing costs) divided by $158 (monthly savings on payment) = 48 months to break even.

What Will My Closing Costs Be?

You can request a Good Faith Estimate (the actual term of art, and also known as a GFE) which will give you a breakdown of your anticipated closing costs.  The GFE can be used to do perform your own calculation to see if refinancing makes sense or not.  Your loan officer or mortgage broker is required by law to furnish you with a GFE within a couple of days of submitting your application. Be sure to also consider any pre-payment penalties that you may incur for paying off your current loan early.

How To Shop For A Mortgage

Shopping around for a mortgage can be tricky since it is difficult to make apples to apples comparisions.  You will find some lenders with lower rates but higher closing costs and vice versa.  I personally believe that banks do this to make it difficult for consumers to effectively comparision shop.  Remember, if you opt for a lower rate in exchange for more upfront costs, it will take that much longer to reach your break-even point (as illustrated above).  If you know for sure you will be in the home for the long run, opting for slighly higher closing costs for a lower rate may be a reasonable thing to do.

To begin with, I would check with Bank Rate Monitor to get a feel for where rates are at in your area.  Rates change daily, so keep a close eye on daily changes and don’t expect today’s rates to be the same in 30 days.  Next, check out a couple of the large national mortgage sites:

Lending Tree

Quicken Loans

Once you have an idea of where rates are at, you can then start looking at local lenders.  Your own bank or credit union would be a good place to begin.  Ideally, it would be better to work through someone locally that you can meet with face to face.  When I worked in the mortgage industry for several years, I heard countless horror stories of people having problems with the big national companies that were only available through an 800 number.  In the case of Lending Tree, they are not actually a mortgage lender.  They provide you with four competing quotes from lenders (which may be in your local area).

Mortgage Refinance Calculators

Bank Mortgage Refinance Calculator

Calculators 4 Mortgages

15 Year Mortgages

If you think the rates on 30 year mortgage are great, the rates on 15 year mortgages are beyond belief.  This may be the perfect time to consider opting for a 15 year mortgage instead of a 30 year.  Depending on your current rate, you may be able to keep roughly the same payment and move down to a 15 year term.

Changes In The Mortgage Industry

If you pursue refinancing, you will quickly learn that the mortgage industry has dramatically changed in the last three years.  Expect much more stringent requirements on proof of income, higher credit scores, tougher appraisals, and more paperwork.  It is a major project, but may be worth thousands in savings over the life of your home loan. 

Have you own ideas on refinancing?  Please share your experience in the comments section below.

Helping you make the most of God’s money!

James L. Paris
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